Finding Solar Opportunity in the Pandemic Downturn

Small-cap UGE International boasts a $50 million project backlog and a $250 million pipeline.

Difficulties facing solar industry operators have been highlighted in recent reports, including by Bloomberg and the Washington Post; among the issues cited are decreasing demand among homeowners, disruptions in supply, and capital shortages.

But not all parts of the solar industry are equal, and while the industry as a whole may be facing headwinds, UGE International Ltd. (UGE:TSX.V; UGEIF:OTCQB) is thriving during the coronavirus-induced downturn. The firm, which focuses on project development in the commercial and community solar sector, announced at the end of March its largest project ever, a 6.6 MW solar installation in Westchester County, New York. The project will feed electricity into the grid and provide savings to community subscribers by selling them energy credits at a discounted rate.

“The project is approximately 12-15 times the size of UGE’s average project and, when completed, will produce power for an estimated 1,000 homes for the duration of the system’s lifetime,” the company stated. The company also has the option of installing battery storage, “which would provide a further boost to project revenue and returns.”

The project in Westchester may be just the tip of the iceberg for UGE. The firm currently has a committed project backlog valued at approximately $50 million, consisting of more than 40 projects, and a pipeline in excess of $250 million. The firm’s global solar experience has exceeded 400 MW.

Several macro factors are working in UGE’s favor. Large real estate owners are clamoring to rent UGE their rooftops, happy to have cash flow during the recession. “There has been a shift in the thinking of real estate owners; they are prioritizing finding ways to earn more revenue,” UGE’s CEO Nick Blitterswyk told Streetwise Reports. “Community solar allows real estate owners to boost revenue by receiving lease payments for their empty rooftops and open land, which is especially attractive during a time when their revenue may otherwise be decreasing.”

Under the community solar model, UGE rents a location, designs, constructs and, in most cases, finances the project, retaining ownership, selling the electricity to community members for less than the price the regional utility is charging. The company is maintaining ownership of many of its projects, allowing it to capture recurring revenue and boosting its gross margins. “The company’s gross margins jumped to 27% in 2019 as it transitioned to this model, from 10-20% in the years prior,” Blitterswyk noted.

UGE also believes it could benefit from the slowdown in construction that has accompanied the pandemic. “We should see more competitive costs for subcontractors and other expenses,” Blitterswyk said. “You could argue that costs of equipment are probably going to go down too.”

Interest rates have tumbled. “To the degree that interest rates are low, that helps us as well,” Blitterswyk explained.

While construction has been restricted in hard-hit areas, such as New York, even that has not affected UGE in a major way. “It may take nine months to fully mobilize, engineer and install a project. So from that perspective, the process is spread out anyway. We are definitely losing a couple of months, but construction is one of the first things opening up as restrictions ease,” Blitterswyk noted. The company “will focus on accelerating schedules once such local restrictions are lifted,” the company announced, and expects to be on-site in most regions that it operates in by the end of May.

Supply lines appear to be intact. “We’ve actually been seeing a surplus of panels. Most of the panels are made in Asia, and Asia seems to have the virus somewhat under control, and factories are producing,” Blitterswyk explained.

The firm notes that “new project development continues at a rapid pace, as demonstrated by the significant number of new projects won in recent weeks. UGE expects to move several of these new projects into the construction phase before the end of the year.”

“Of our $50 million backlog, we expect about one-quarter will be fulfilled in 2020 and the remainder in 2021, so we are looking at 80 to 100% growth in both 2020 and 2021,” Blitterswyk stated, “just based on the projects we already have under contract.”

UGE has around 24 million shares outstanding, and around 27.6 million fully diluted; management and insiders own 55%. The company’s market cap is around CA$6.7 million.

Disclosure:
1) Patrice Fusillo compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: UGE International. Click here for important disclosures about sponsor fees.
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5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of UGE International, a company mentioned in this article.

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